Monday, October 29, 2012

Martin Wheatley, UK Financial Services Authority
Managing Director, and Chief Executive-designate of the new Financial Conduct
Authority, told a Joint Select Parliamentary Commission on Banking Standards
that the FCA will be guided by achieving the proper outcomes for investors and
consumers of financial products. The FCA will have
the ability to look closely at the financial products being designed and
provided and, in extreme cases, use new regulatory powers to ban products

Andrew Tyrie MP,
Commission Chair, asked how the FCA will know if a financial product is the
right financial product for investors. Mr. Wheatley said that the FCA will not
have a product pre-approval regime, adding that the Authority will not stand in
the way of people innovating and taking new products to market. When something
goes wrong, he noted, the FCA will step in and ask of the product is the wrong
product for the investor class it is being sold to. It is all about outcomes,
he said, getting the right outcomes for investors and consumers of financial
products. He noted that good financial products sold badly become poor outcomes
for investors. It is question of whether investors are getting good or bad
outcomes. For example, some complex products could be appropriate for some
investors, he noted, but not for others. The FCA will not say that a financial product
is unsuitable in all circumstances. It will often be an individual facts and
circumstances decision. The FCA will look at a firm’s governance, its target
market and how it is selling to that market.

Asked if there should
be a benchmark of plain vanilla financial products, the Director said that it
would be difficult for the FCA to bless plain vanilla products because even
those products could have bad outcomes for investors and consumers if sold in
the wrong way and to the wrong market.

Asked by Chairman
Tyrie if the FCA would create a safe harbor for a product, the Director said
that the FCA could do that but it would be at a high cost since the agency
would have to go through a great amount of detail and bring a great amount of expertise
to bear in order to give such assurance. It would not be possible to develop this
expertise on every financial product before it is launched, he said, nor would the
FCA do it randomly. The FCA would do it if the agency perceived a financial
product was causing bad outcomes for investors.

Lord Lawson
emphasized the need the for reform of incentive-based compensation regimes,
such as bonuses, at financial firms. The
Director noted that a compensation regime of incentives focused on short-term
profits led to excessive risk-taking at financial firms. A change in accounting
standards could help by discouraging the booking of profits up front on
long-term trades and linking bonuses to that. Accounting standards could
require amortization over a longer term. He also said that legislation capping
bonuses that can be paid would be helpful in changing the current culture, as
well as requiring that bonuses be paid over a longer period and that there be
clawback of bonuses under certain circumstances. In addition, as a best
practice, the FSA is asking financial firms to design their incentive compensation
regimes to produce good outcomes for
investors. This would be outside of statutory intervention.

Andrew Love MP, noted
that insider trading is widespread but extremely difficult to prosecute, adding
that the UK does not bring as
many enforcement actions for insider trading as the US. Mr. Wheatley noted that the FSA
is taking a robust approach to insider trading and taking on complex and difficult
cases. He noted that, under the UK
sentencing structure, UK
courts do not give as high a sentence for insider trading as US courts. There
are two main differences between the US
and the UK
in this area, he said. First, in the UK,
wiretaps are not available to the authorities in insider trading cases and,
second, because of high sentences in the US, often someone will turn state’s
witness.

Baroness Kramer noted
that whistleblowers seem to have more incentives in the US and asked if
the FSA has looked at enhancing the use of whistleblowers. The Director said
that the FSA has not looked at the incentive structure, but added that the FSA
does have whistleblowers come forward and does provide protection, but it is
not at the same scale as in the US.
Chairman Tyrie noted that the Commission is looking into legislation to enhance
whistleblowing, adding that the central question is what incentives can be
provided without creating a moral hazard.